Consensus Is Moving Towards QE3 Getting Announced This Week

This one's been a long time coming. And it finally looks like we might actually get the official word on QE3. Analysts at several of the big research houses have now said this is the meeting where it's going to happen. JP Morgan analysts say:

"The debate about Fed action next week has been ended as a result of the weak August payroll report. Look for action on two fronts. The Committee will initiate a new round of asset purchases, with agency-MBS constituting some, if not all, of these purchases. The Committee should also push back its low-rate guidance from late 2014 to mid-2015, with this guidance possibly augmented to note that exceptionally low interest rates will be maintained even as the recovery progresses.

Such a statement would be a partial nod to the Evans rule. Although this is not our baseline view, movement toward an Evans rule—whereby policy is kept extremely easy until the unemployment falls below 7% as long as inflation remains below 3%—is likely to become the centerpiece of the next round of policy stimulus if the labor market remains soft as we turn into 2013."

"[W]e expect the Federal Open Market Committee (FOMC) to announce a return to asset purchases as well as a lengthening of the FOMC's forward guidance for the first hike in the funds rate to mid-2015 or beyond at the September 12-13 FOMC meeting. Our baseline forecast is an open-ended purchase program, focused on agency mortgage-backed securities.

[O]ur "double punch" Fed call relates to the much-discussed study presented by Columbia University professor Michael Woodford at Jackson Hole last Friday. Woodford argues that forward guidance is a powerful tool both in theory and practice. But in his view the effect of asset purchases is largely confined to their role in conveying guidance about future monetary policy actions. …

We fully agree with Woodford's view that such aggressive guidance measures could be a powerful tool. However, we also believe that Fed officials are unlikely to adopt them anytime soon.

Fortunately, we are somewhat more optimistic than Woodford with regard to the impact of Fed asset purchases. … we believe that a more moderate strengthening of the forward guidance coupled with renewed asset purchases could provide a decent amount of monetary easing next week."

So it looks like the consensus is for more asset swaps and wishful thinking as to how exactly these asset swaps impact the real economy. My estimation is not much. But from a market perspective, it's clear that the portfolio rebalancing effect and the psychological impact is very powerful so plan accordingly….